Gold & Silver Company Investing (Pt 2)

by Wes Bridel on August 16, 2010

in Stewardship

If you’re invested in a particular gold or silver mining company (as opposed to a diversified holding such as an ETF or mutual fund), then you have the risk that something goes wrong with that companies holdings (along with the potential reward that things go fantastic with its holdings).  We’ve been discussing gold & silver mining company investing. Today we look at the different types of Miners you can invest with and the advantages of each…

Examples of this risk could be a resource not proving to be what it was expected to be.  Or a particular jurisdiction where the company has massive investment turning against mining.  Along with all the other risks that are always present when investing with any one company.

If you’ve decided to invest in miners, there are more choices to make.  Should you invest in:

1) Major (Senior) Producers

2) Junior Producers

3) Explorers

A Major producer is going to be the most stable.  They have assets all over the world and large annual production.  The risks of one event decimating the value of the company are very small.  At the same time, the reward of a major new discovery is not as accretive to the value for shareholders.

The opposite is true of a Junior (or smaller) producer.  It has more risk associated with its fewer ventures, but can do really well with a major discovery.  These also have the potential of being bought out at a hefty premium by the Majors.

Different people categorize miners in different ways, so if you see talk of a Mid-Major or something similar, this would be a company somewhere in between.

An Exploration focused company is on the extreme end of risk and reward.  They typically have no production.  They are simply searching for gold at the end of a rainbow.  Most of these companies are money pits which do nothing but take money from starry eyed “investors”.  The few companies of this type that do strike the big find see their share prices grow at unbelievable multiples.

If you would prefer to reduce the headaches and risks of managing a portfolio of individual stocks, you might want to invest through either an ETF or a Mutual Fund.  An ETF will be a diversified low cost way to invest in many miners.  A Mutual Fund will have higher costs, but will give you the management expertise of that manager &/or team.

Gold & Silver Streamers

A streamer is a royalty company.  It is like an investment bank to the mining industry.  The companies provide funding to junior miners who have found a gold or silver resource, but who don’t have the capital to fund the drilling.

The streamer steps in and provides this funding in return for a future stream of gold or silver at a set price.  For instance, a gold streamer might provide money up front in order to buy a set amount of gold each year at a cost of $300/ounce.  The beauty of this model is that if the price of oil or other inputs increases down the road, this will not have any impact on the streamer because its price of acquisition for each ounce is set.  Because it owns a future stream of low cost gold or silver, it has nice low risk leverage to the price of gold or silver as it appreciates.

Next, we’ll look at ways to use leverage to increase your returns on gold and silver investing (that are in some ways less risky than what we’ve been talking about) as well as wrap up this series on gold and silver with some last thoughts.

If you have any thoughts or questions on this or other topics, please let us know.

If you’re invested in a particular gold or silver mining company (as opposed to a diversified holding such as an ETF or mutual fund), then you have the risk that something goes wrong with that companies holdings (along with the potential reward that things go fantastic with its holdings). We’ve been discussing asset management in a crazy economy. Examples of this risk could be a resource not proving to be what it was expected to be. Or a particular jurisdiction where the company has massive investment turning against mining. Along with all the other risks that are always present when investing with any one company.

If you’ve decided to invest in miners, there are more choices to make. Should you invest in:

1) Major (Senior) Producers

2) Junior Producers

3) Explorers

A Major producer is going to be the most stable. They have assets all over the world and large annual production. The risks of one event decimating the value of the company are very small. At the same time, the reward of a major new discovery is not as accretive to the value for shareholders.

The opposite is true of a Junior (or smaller) producer. It has more risk associated with its fewer ventures, but can do really well with a major discovery. These also have the potential of being bought out at a hefty premium by the Majors.

Different people categorize miners in different ways, so if you see talk of a Mid-Major or something similar, this would be a company somewhere in between.

An Exploration focused company is on the extreme end of risk and reward. They typically have no production. They are simply searching for gold at the end of a rainbow. Most of these companies are money pits which do nothing but take money from starry eyed “investors”. The few companies of this type that do strike the big find see their share prices grow at unbelievable multiples.

If you would prefer to reduce the headaches and risks of managing a portfolio of individual stocks, you might want to invest through either an ETF or a Mutual Fund. An ETF will be a diversified low cost way to invest in many miners. A Mutual Fund will have higher costs, but will give you the management expertise of that manager &/or team.

Gold & Silver Streamers

A streamer is a royalty company. It is like an investment bank to the mining industry. The companies provide funding to junior miners who have found a gold or silver resource, but who don’t have the capital to fund the drilling.

The streamer steps in and provides this funding in return for a future stream of gold or silver at a set price. For instance, a gold streamer might provide money up front in order to buy a set amount of gold each year at a cost of $300/ounce. The beauty of this model is that if the price of oil or other inputs increases down the road, this will not have any impact on the streamer because its price of acquisition for each ounce is set. Because it owns a future stream of low cost gold or silver, it has nice low risk leverage to the price of gold or silver as it appreciates.

Next, we’ll look at ways to use leverage to increase your returns on gold and silver investing (that are in some ways less risky than what we’ve been talking about) as well as wrap up this series on gold and silver with some last thoughts.

If you have any thoughts or questions on this or other topics, please let us know.

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